Under Trump’s new plan, five pilot states will have the power to negotiate directly with drugmakers rather than adhering to the national price formula. And Medicaid programs in those states would be exempt from the requirement that they cover all FDA-approved drugs – an out that could mean huge savings if states refuse to pay for expensive medications.

According to federal data on health spending, Medicaid spending on prescription drugs rose by 63 percent between 2010 and 2016, although the rate of increase has also slowed considerably since 2014. Much of the surge in spending can be attributed to the 16 million more people who were able to enroll in Medicaid under the Affordable Care Act.

Medicaid already pays comparatively low prices. According to a study this spring by Altarum, a nonprofit health consulting and research company, Medicaid paid 39 cents on the dollar for prescription drugs compared with 69 cents for Medicare Part D, the prescription program in the health plan for the elderly, and 84 cents for private insurance companies.

Rebate System

Under federal law, manufacturers are required to give rebates to Medicaid for prescription drugs. The rebates are either 23.1 percent of the average manufacturer’s price for the medication or the difference between the average manufacturer’s price and the cheapest price paid by any buyer, whichever is greater.

Medicaid gets an additional discount if a drug’s price rises faster than inflation. Another administration proposal would remove the cap on inflation-related discounts for drugs whose prices more than doubled.

In addition, state Medicaid agencies negotiate supplemental rebates in return for their agreement to give preferential treatment to selected drugs.

Pharmaceutical companies are willing to put up with these conditions so Medicaid agencies will carry their drugs on their formularies, their lists of covered drugs. More than 70 million people are enrolled in Medicaid or the related Children’s Health Insurance Program – a huge market that drugmakers are eager to tap.

The pilot program would scrap the rebate system and allow state Medicaid agencies to exclude certain FDA-approved drugs from their formularies. If a drug company didn’t offer a low enough price, the Medicaid agency could leave its drug off its formulary. The five pilot states have yet to be chosen.

Massachusetts officials submitted a similar proposal to the U.S. Centers on Medicare and Medicaid Services. Their idea is that having a closed Medicaid formulary will allow negotiators to extract better prices from drugmakers.

Arizona officials also have expressed an interest in closing its formulary.

Under Massachusetts’ proposal, its Medicaid agency would be able to exclude prescription medicines if it offered at least one medicine in every “therapeutic class,” that is, treatments intended to address a specific condition or illness, such as blood clots or angina.

Its plan also seeks authority to evaluate the effectiveness of newly introduced drugs compared with other medicines in the same class, information state negotiators could use in talks with drugmakers.

'Going to Get Crushed'

But some health policy analysts worry that consumers will be hurt if Medicaid agencies are able to drop medications that treat some patients’ conditions or illnesses better than others.

“My concern is that if a drug was clinically effective, you wouldn’t want to see a state exclude it solely based on cost,” said Edwin Park, a research professor at Georgetown University’s Health Policy Institute.

Some organizations that advocate on behalf of people with particular illnesses, such as cancer and heart disease, have joined the lobbying arm of the drug manufacturers, Pharmaceutical Research and Manufacturers of America, in objecting to Massachusetts’ application.

Although the drugmakers’ group hasn’t responded to the president’s Medicaid proposals, Matt Salo, executive director of the National Association of Medicaid Directors, said he expects drug company lobbyists will descend on the states participating in the pilots to obstruct changes to the rebate formula.

“The states who step up to the plate on this are going to get the entirety of the lobbying agenda of all of pharma brought to bear on them, and they are going to get crushed,” Salo said. “And it’s not going to work.”

Commercial insurers and the Veterans Health Administration already have closed formularies, but it’s unclear whether they lead to lower prices or improved health outcomes.

While 74 percent of closed formularies result in lower prices, 21 percent result in price increases, a 2016 report in the American Journal of Managed Care found. And 29 percent of patients were affected by formulary exclusions.

Analysts do say that if Medicaid abandoned its current “best price available” requirement, that change could have a beneficial effect on the rest of the market. Drugmakers are wary of offering commercial or even Medicaid plans a best price for fear they’d have to make that price available to all Medicaid agencies.

“Companies often argue that they are unable to provide discounts to private payers because of Medicaid’s best price requirement,” said Rachel Sachs, an associate professor of law at Washington University in St. Louis and an expert on drug regulation. “But we created the best price program for a reason. We wanted public payers, particularly those that function as a safety net, to pay the lowest price.”

While Sachs and other analysts are skeptical that the Trump Medicaid proposal will lower drug prices, they hope that it will help policymakers identify solutions to one of the key budget breakers in Medicaid: the introduction of specialty drugs for specific conditions that carry unprecedented price tags, sometimes in the hundreds of thousands of dollars a year.

While many experts think the rebate system has served Medicaid well, it hasn’t proved as useful with extraordinarily high-priced specialty drugs, particularly when those drugs have no competition.

“There are many drugs that continue to strain state budgets,” Sachs said, “drugs they feel they shouldn’t have to pay so much for.”

Gov. Gavin Newsom and Mayor Bill de Blasio initiated ambitious plans this week to cover drastically more residents, including undocumented immigrants who are not currently eligible for subsidized insurance.